FHA vs. Conventional Loan: The Pros and Cons

Our latest mortgage match-up pits FHA loans against conventional loans, both of which are popular home loan options for home buyers these days.

In recent years, FHA loans surged in popularity, largely because subprime lending (and Alt-A) was all but extinguished as a result of the ongoing mortgage crisis. Simply put, the FHA stepped in to fill the void after private lenders closed up shop.

Some even claim FHA loans are the “new subprime,” mainly because of the low down payment and credit score requirements, despite originally being geared toward low and moderate-income borrowers.

But you don’t have to be a subprime borrower to take advantage of an FHA loan. In fact, some borrowers may have excellent credit and still go the FHA route because it makes more financial sense.

FHA and Conventional Loans Both Offer a Great Low Down Payment Option

You can get an FHA loan with 3.5% down

Or a conventional loan with just 3% down

FHA is more flexible in terms of credit score

But also consider the cost of mortgage insurance when comparing the two

First off, whether you go FHA or conventional, know that the down payment requirement is minimal. So you don’t need much in your bank account to get approved.

As noted, FHA home loans have become insanely popular. The main selling point of an FHA loan is the 3.5% minimum down payment requirement coupled with a low credit score requirement. That’s a one-two punch.

However, in order to qualify for the government loan program’s flagship low down payment option, you need a minimum credit score of 580. A score below 580 requires a 10% down payment, which most home buyers don’t have.

And 580 is just the FHA’s guideline – individual banks and mortgage lenders still need to agree to offer such loans. So there’s a very good chance you’ll need an even higher credit score with many lenders.

Of course, a 580 credit score is pretty dismal…and you should certainly strive for better, even if you are able to qualify for an FHA loan.

Along with that, an eligible donor can provide gift funds for 100% of the borrower’s closing costs and down payment. And no reserves are required if it’s a 1-2 unit property. In other words, you don’t need much if any cash to finance your home purchase with an FHA mortgage.

But thanks to new guidelines issued by Fannie Mae and Freddie Mac, you can now get a conventional loan with just 3% down .

That means the FHA is no longer winning in the down payment category if you ignore credit score. Both FHA and conventional loans can be had for very little down!

However, the FHA vs. conventional loan battle doesn’t end there. We need to consider other factors, such as credit score.

FHA Loans Good for Those with Poor Credit

There’s not one clear winner

It will depend largely on your credit score

FHA loans benefit those with low scores

Conventional loans cheaper for those with better credit

While FHA mortgages require a slightly higher minimum down payment, you only need a 580 FICO score for approval.

The screenshot above from the Urban Institute details when FHA wins out over conventional lending, and it tends to happen if credit scores fall below 720. The gray shaded sections show when FHA financing is the better deal.

We can see that FHA financing is remarkably cheaper for borrowers with credit scores between 620-679, and marginally cheaper for scores between 680-719.

The blue shaded sections show when you’re better off going with a conventional home loan. The biggest benefit seems to be for borrowers with credit scores of 760+. Of course, you’ll need to plug in your actual numbers into a mortgage calculator to see what works for you.

The other major selling point to an FHA loan is that the minimum credit score is 500. Again, this is subject to lenders actually offering programs for scores this low. And as mentioned, scores between 500 and 579 require a higher minimum down payment of 10%.

But FHA loans can be a good option for those with bad credit and little set aside for down payment who are determined to get a mortgage.

FHA Loans Hugely Popular with First-Time Buyers

Chances are if you’re a first-time home buyer, you’ll use an FHA loan over a conventional loan.

Just look at the chart above from the Urban Institute, which details the FTHB share of purchase mortgages by loan type.

As you can see, the FHA was dominated by FTHB with an 82.8% share in October 2018. Yes, nearly 83% of those who used an FHA loan for a home purchase were first-timers.

Meanwhile, only 47.8% share of purchase loans backed by the GSEs (Fannie Mae and Freddie Mac) went to first-timers.

The reason this might be the case is due to the low credit score requirement coupled with the low down payment requirement.

Since first-timers are often short on down payment funds (because they aren’t selling a prior residence and using the proceeds toward the new home), FHA tends to be a good fit.

Speaking of mortgage rates, FHA loans tend to come with slightly lower interest rates, though one has to consider the entire payment (with mortgage insurance included) to determine what’s the better deal.

The box above actually assumes an interest rate of 4.70% for an FHA loan and 4.66% for a similar conventional one, though you’ll need to consider actual and current mortgage rates. This is somewhat unusual since it’s usually the other way around.

This spread can vary over time and there’s a good chance FHA mortgage rates will be lower than conventional ones in the future, so pay attention to current rates on both products as well.

I wouldn’t bank on FHA rates being higher, so if reality turns out to be different, it can certainly change the outcomes in the table above.

FHA Loans Subject to Mortgage Insurance

Mortgage insurance is unavoidable on an FHA loan

And will often remain in force for the entire loan term

Conventional loans allow you to drop MI at 80% LTV

Which is a huge advantage

We’ve talked about some benefits of FHA loans, but there are drawbacks as well.

The major one is the mortgage insurance requirement. Those who opt for FHA loans are subject to both upfront and annual mortgage insurance premiums, often for the life of the loan.

The upfront mortgage insurance requirement is unavoidable, and nearly doubled from 1% to 1.75% back in 2012. And the annual premium can no longer be avoided.

Since 2013, many FHA loans now require mortgage insurance for life, making them a lot less attractive and expensive long-term! The never-ending FHA MIP could be the tipping point for some.

At the same time, the max loan-to-value ratio for a cash out refinance is a very low 85%, which makes them a poor choice for tapping equity. But they’re mostly used for home buying anyway.

Conventional Loans Offer Many More Options and Just 3% Down!

Access to more loans programs (fixed, ARMs, etc.)

And you can get financing on more property types

Including vacation homes and investment properties

And the minimum down payment requirement is lower!

Now let’s discuss conventional loans, an alternative to FHA loans that tend to offer a lot more variety.

With a conventional loan, which includes both conforming and non-conforming loans, you can get your hands on pretty much any home loan program from a 1-month ARM to a 30-year fixed, and everything in between.

So if you want a 10-year fixed mortgage, or a 7-year ARM, a conventional loan will surely be the way to go.

And now you can get a conventional loan with just 3% down, which actually beats the FHA’s down payment requirement slightly!

Another benefit of going with a conventional loan vs. an FHA loan is the higher loan limit, which can be as high as $726,525 in certain parts of the nation.

This can be a real lifesaver for those living in high-cost regions of the country (or even expensive areas in a given metro). With an FHA loan, you might be stuck with a maximum loan amount just above $300,000.

For example, it caps out at $314,827 in Phoenix, Arizona. That pretty much ends the discussion if you’re planning to buy even semi-expensive real estate there. Your only option will be a conventional mortgage loan.

Anything above the FHA loan limit is considered a jumbo loan, and will often come with a higher mortgage rate and tougher underwriting criteria, such as a higher down payment requirement and more limited debt-to-income ratios.

However, jumbos are still technically considered conventional mortgages because they aren’t government loans. And more importantly, they aren’t capped at a certain loan limit because they live outside the requirements of Fannie Mae and Freddie Mac.

For those who need a true jumbo loan, a conventional mortgage will be the only way to obtain financing.

Are Fannie Mae and FHA the same thing?

People seem to confuse these two, so let’s put it to rest. The answer is NO.

Fannie Mae is one of the two government-sponsored enterprises (a quasi-public company) along with Freddie Mac that issues conforming mortgages, whereas FHA stands for Federal Housing Administration, a government housing agency that insures mortgages.

They have a similar mission to promote homeownership and compete with one another, but they are two completely different entities.

No Mortgage Insurance Requirement on Conventional Loans

If you put down 20% or have 20% equity

You won’t have to pay mortgage insurance

Some lenders may even waive MI regardless of the LTV

By offering a slightly higher interest rate

You won’t be subject to mortgage insurance premiums if you go with a conventional loan, assuming you put 20% down, or have at least 20% home equity when refinancing.

Even if you’re unable to put 20% down, there are low down payment loan programs that don’t require private mortgage insurance to be paid out of pocket.

In fact, the Fannie Mae Homepath program only requires a three percent down payment with no minimum borrower contribution (and you can get up to a 3% credit for closing costs).

Additionally, there are select lender programs that offer 3% down with no MI, so in some cases you can put down even less than an FHA loan without being subject to that pesky mortgage insurance.

Of course, you can argue that the PMI is built into the rate when putting down less than 20%, even if it isn’t paid explicity. So you might get stuck with a higher interest rate if you make a small down payment and don’t have to pay PMI.

As noted, conventional mortgages require a down payment as low as three percent, so low down payment borrowers with good credit may want to consider conventional loans first.

You Can Get Conventional Loans Anywhere

All mortgage lenders offer conventional loans

Whereas only some banks originate FHA loans

Not all condos are approved for FHA financing

And you can’t get an FHA loan on second homes or non-owner occupied properties

Another plus to conventional mortgages is that they’re available at pretty much every bank and lender in the nation.

That means you can use any bank you wish and/or shop your rate quite a bit more. Not all lenders offer FHA mortgage loans, so you might be limited in that respect.

Additionally, conventional loans can be used to finance just about any property, whereas some condo complexes (and some houses) aren’t approved for FHA financing. If you’re actively shopping, real estate agents will probably point this out to you.

The FHA has minimum property standards that must be met, so even if you’re a great borrower, the property itself could hold you back from obtaining financing. In other words, you might have no choice but to go the conventional route.

The same goes for second homes and non-owner investment properties. If you don’t intend to occupy the property, you will have no choice but to go with a conventional loan.

Let me make it very clear; the FHA home loan program is only good for owner-occupied properties!

Final Word: Is an FHA Loan Better than Conventional?

There is no definitive yes or no answer

You have to look at your loan scenario specifically

Consider how long you’ll keep the loan and what your goals are

Compare and contrast and do the math!

These days, both FHA and conventional loans could make sense depending on your unique loan scenario. You can’t really say one is better than the other without knowing all the particulars.

And as noted, you or the property may not even qualify for an FHA loan to begin with, so the choice might be made out of necessity.

Both loan programs offer competitive mortgage rates and closing costs, and flexible underwriting guidelines, so you’ll really have to do the math to determine which is best for your particular situation.

Even with mortgage insurance factored in, it may be cheaper to go with an FHA loan if you receive a lender credit and/or a lower mortgage rate as a result.

Conversely, a slightly higher mortgage rate on a conventional loan may make sense to avoid the costly mortgage insurance tied to FHA loans.

Generally speaking, those with low credit scores and little set aside for down payment may do better with an FHA loan, whereas those with higher credit scores and more sizable down payments could save money with a conventional loan.

Also consider the long term picture. While an FHA loan might be cheaper early on, you could be stuck paying the mortgage insurance for life. With a conventional loan, you’ll eventually be able to drop the PMI and save some dough.

What a lot of folks tend to do is start with an FHA loan, build some equity (typically through regular mortgage payments and home price appreciation), and then refinance to a conventional loan. In that sense, both loan types could serve one borrower over time.

Ask for a side-by-side cost analysis, but also make sure you understand why one is better than the other. Don’t just take their word for it! They might be inclined to sell you one over the other…

Lastly, be sure to consider the property as well, as both types of financing may not even be an option.

Tip: If you want a zero down loan, aka have nothing in your savings account, consider VA loans or USDA home loans instead, both of which don’t require a down payment. There is also the FHA 203k loan program, which allows you to make home improvements and get long-term financing in one loan.

Now let’s sum it all up by taking a look at a condensed list of pros and cons for FHA and conventional loan programs.

FHA Loan Pros

Low down payment requirement (3.5% down)

Lower credit score needed (580 for max financing)

Lower mortgage rates

May be easier to qualify for than a conventional loan (higher DTIs allowed)

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 13 years.

99 Comments

Justin McClellandFebruary 15, 2013 at 11:40 am -

I appreciate you breaking down these differences in summary. It surely beats reading thru the dry content of hud.gov and other sites to get a quick snapshot of the two types.

LeoraJune 30, 2013 at 8:06 am -

Thanks for the side-by-side comparison. I’m going to have the bank show me both options to see which will cost me the least. I know the insurance costs went up, but if the interest rate is cheaper, it could be better to go with the FHA.

BettyNovember 6, 2013 at 6:20 pm -

I was told that my rate on an FHA loan would be about 0.25% cheaper than a conventional loan, but with mortgage insurance premiums factored in the costs eclipse the interest rate savings. Why is the FHA charging so much for insurance. What’s the point of offering a low rate if it doesn’t really cost less?!?!?

Colin RobertsonNovember 7, 2013 at 10:06 am -

It’s great that you picked up on that. You need to look at both the rate and the costs to get an accurate picture of which mortgage may be best for you. The FHA has increased mortgage insurance premiums several times now to shore up its capital reserves after making a bunch of high-risk, bad loans in the past. So essentially today’s FHA borrower is paying for the offenses of the past. If rates and costs were low, the FHA would be inundated with loan applications, as it was before their most recent cost increases.

AndrewMarch 31, 2014 at 6:06 am -

yes betty it is pointless im paying almost 300 a month on mip which when u add it up is way more than a regular high interest conventional and Im stuck with it for 9 yrs so point is don’t just look at the low interest rate from fha

ChandruAugust 31, 2014 at 8:14 am -

Hi

I am planning to purchase a house worth 670k in Culver City area. I heard FHA has a maximum financing of unto 625,500. So, i am making 7% down payment as against 3.5%. I am also paying MIP. So i would want to know can i get any conventional loan with 7% down payment for purchase price 670k….i was told minimum is 10% down for conventional loan for loan value above 430k. Please let me know if i have any option……

Best Regards Chandru

Colin RobertsonSeptember 2, 2014 at 11:44 am -

Chandru,

It’s possible to go conventional with just 5% down (or even lower in some cases), though it might be difficult to find such a lender at the higher loan limits you mentioned. You’re probably better off putting 10% down if possible to expand your options and lower your interest rate. In any case, shop around with a broker and local banks/lenders to see who can do what. Offerings will vary from bank to bank.

CarolOctober 1, 2014 at 5:03 pm -

Hello. We thought we were going to have a VA loan, but they denied us. We would like to try conventional. Can you tell me the best way to look for a conventional loan. We already have a loan through a bank, should we start with them since we have a good standing with them? Thank you, Carol

Colin RobertsonOctober 1, 2014 at 5:49 pm -

Hey Carol,

Banks are okay, but vary in their quality of service, rates, and offerings. So it really depends on the bank in question. You could also try a broker who can shop your scenario around with multiple lenders to see where it’s the best fit. They can also help you with any snags you might run into. Alternatively, a credit union might also be a good avenue to try.

CathrynOctober 19, 2014 at 4:41 pm -

Hi Colin,

Thank you for this information! It has helped my husband and I have a better understanding as to which loan would suit our needs. Although, I am still confused with the PMI for FHA loans. We plan to put 20% down payment on a home – would we still have to pay the PMI for an FHA loan? I’m not sure what their PMI rules are, but I assume paying 20% down would eradicate the PMI payment over the life of the loan.

Which loan would you consider best for those who take the 20% down payment route?

Colin RobertsonOctober 20, 2014 at 9:58 am -

Cathryn,

You still have to pay mortgage insurance on an FHA loan even if your LTV is 80% or less. So if you’ve got 20% to put down, a conventional loan should be the better deal because you won’t have to pay PMI every month (or upfront), even if the interest rate is slightly higher on the conventional loan. This is why the FHA has become a lot less popular. Shop around and you’ll see the difference in total payment.

paulNovember 17, 2014 at 10:09 pm -

Hi Colin, 1st off thank you so much for sharing your knowledge and helping all of us. Our broker/lender qualify’s us for FHA of course with upfront & monthly PMI (around $260 per month) & interest at 3.375%….But we can maybe also qualify for conventional with slight higher 4.25% with no PMI for between 5 to 10% down…Which one works best? My thoughts are conventional but hopefully we qualify cuz I’m self employed….He has to go thru underwriting to make sure we can get conventional. I’d rather do conventional. He also, mentioned we can get out of PMI after 1 or 2 Yrs after having FHA thru refinance….is this true? Please advice us thank you, Colin.

Colin RobertsonNovember 18, 2014 at 10:06 am -

Hey Paul,

It really depends on the actual numbers and what you plan to do with the loan/property long term. Sure, you can always refinance out of the FHA, assuming you qualify for a conventional loan when that time comes. And that’s the rub…you say you’re self employed so will you be able to refi in the future without any issues? And will rates still be low at that time? Possibly yes, possibly no. Going with a loan you actually want to stick with has its benefits, assuming that’s your goal. But again, have him/her sit down and really go through the numbers to weigh the pros and cons. FHA is kind of disastrous at the moment because the mortgage insurance is generally in place for life now. Good luck!

AdrienneJanuary 5, 2015 at 8:53 pm -

Hi Colin, My husband and I just passed the four year mark from a former foreclosure. We talked to a bank about the prospect of purchasing a new home. After a little research they gave us the news that we could get a mortgage, but it would have to be an FHA. The terms and conditions do not thrill us. Would we be eligible for a conventional loan after the seven years have passed and the foreclosure is off our credit?

Colin RobertsonJanuary 5, 2015 at 9:08 pm -

Hi Adrienne,

FHA loans can be pretty expensive compared to conventional loans, but when it’s the only option, you often pay a premium. But do the math either way. The waiting period for conventional loans is generally seven years (3 years with extenuating circumstances), though there’s no absolute guarantee you’ll qualify for a mortgage unless everything else adds up, such as income, job, assets, credit score, and so forth. You may want to get a second (or third) opinion on your financing options.

chuckJanuary 8, 2015 at 9:41 pm -

hello Colin,

Really confused on which way to go conventional or FHA. We have great credit and have been approved for conventional already. We plan on putting 5% down on a 30 year note. Since the President has lowered the insurance on the FHA loans would it be even worth looking at?

Colin RobertsonJanuary 9, 2015 at 12:51 pm -

Chuck,

It’s always smart to take the time to compare loan options just in case one turns out to be a better deal for you. Not sure the reduced premiums will completely change the argument, but it’s probably worth a look if you’ve got the time. The problem is the mortgage insurance still stays in force for the life of the loan on FHA loans in most cases…

Alex BulgueroniJanuary 13, 2015 at 1:58 am -

Hi Colin,

I have an existing FHA loan on my primary residence. I want to refinance (cash out) my property, and leave it at 80% LTV. Do I still have to pay mortgage insurance if I choose a FHA loan ? Should I get an conventional instead ?

Colin RobertsonJanuary 13, 2015 at 11:00 am -

Yes, all FHA loans have mortgage insurance requirements now. In the past, certain loans (less than or equal to 78% LTV and 15-year term) could avoid annual mortgage insurance, but not any longer. If you go conventional you won’t have to deal with mortgage insurance. So you may want to look at a conventional option, which might be a lot cheaper. Do the math to see what the best deal is for you.

ElijahJanuary 15, 2015 at 9:02 am -

Colin,

I hate to be redundant based on the questions you’ve already been asked above, but I wanted to further clarify. We are 5-years post foreclosure, and have more than 20% to put down. However, the foreclosure makes us only qualify for FHA loans. Would we have PMI for the life of the loan? The LTV criteria has been eradicated? Also, our broker is trying to talk us into the FHA saying that because our debt to income ratio is below 30% on the house we are buying, refinancing to a conventional loan in 24 months when the 7-year foreclosure timeframe has completely passed is going to be “very easy for us”. Do you think she’s being straightforward?

Colin RobertsonJanuary 15, 2015 at 10:47 am -

Elijah,

All FHA loans have mortgage insurance now, though not all have it for the life of the loan. Some only require it for 11 years, though most borrowers will have it for life because they put very little down. Many borrowers with FHA loans eventually refi to conventional loans to get rid of the mortgage insurance, and that’s sound logic. It just depends where interest rates are in two years and if you still qualify for a mortgage…you never know what circumstances may change. But if FHA is your only option, there’s not much else you can do.

Alex BulgueroniJanuary 17, 2015 at 12:44 am -

Colin,

I just wanted to thank you for taking the time to answer all our questions. BIG aloha to you

jimmyJanuary 23, 2015 at 9:18 am -

Colin,

I have FHA loan, the house was 180k and I down payment 19k with 4.7% interest. The owner of the house did pay the closing cost of 5k. Was it good that I went with FHA instead of conventional loan? This is a 30 year term.

Colin RobertsonJanuary 24, 2015 at 11:54 am -

Jimmy,

I don’t know what the terms of a conventional loan would have been, so it’s impossible to tell you with certainty. It depends on your FICO score, when you took out the loan, what the PMI vs. MIP would be, how long you plan to hold the loan, etc.

sandyJanuary 29, 2015 at 2:42 pm -

Hi! Love all the info on here!

We were approved and passed through underwriting for an FHA 3.5% down on a 155,000 home purchase with 3% seller’s concession. However, we just failed the FHA appraisal due to septic distance from well (needs to be 50 feet, we are at 45 ft) . Our lender said only option is 5% conventional, or wait for the 3% conventional to pass down through corporate so they can offer it. Waiting for the 3% conv. is not an option since we are purchasing an unoccupied short sale. Soo my question is, we just received a revised gfe of 4.625% on our 5% conventional loan. Under the FHA it would have bee 4% even. Is this crazy high? Credit score has gone up 20 points since we first were approved, but lender said they do not run credit again? (score aprox 670). Any advice is appreciated, thanks!

Colin RobertsonJanuary 29, 2015 at 5:22 pm -

Sandy,

It’s possible that conventional rates can be .375% to .50% (or more) higher than FHA. Also if your mortgage insurance is lender-paid, that could explain a higher conventional rate as well because it’s built into the rate.

MicaelaFebruary 6, 2015 at 3:29 pm -

I’m interested in buy a house to live in (not rent out). I don’t have a set time frame to buy one I”m just now starting to look at what I need to learn. After reading your Blog and all the Q&A, I can tell I have a LOT to learn.

Can you recommend any reading material? I know absolutely nothing about restate/buying a home. I feel like this topic is over my head.

With the market the way it is and a lot of uncertainty in houses and as well as everyone thinking about the next bubble, finding books on this topic during this time frame is not an easy task.

Thank you Colin

Colin RobertsonFebruary 6, 2015 at 9:29 pm -

Hi Micaela,

First off, I’m glad you’re taking the time to research and learn. That alone is huge and something many individuals don’t bother to do. I wouldn’t say there’s one single resource that has all the answers…just visiting blogs like mine over time will help you better understand the real estate world. And staying up on the news as much as possible. Oh and Zillow just released a book actually, so that might be a good read. Lastly, you know your own neighborhood best. Within your desired area, single out the good parts, then look at the pros and cons of the property, where it’s located, the school district, the property history, etc. And if prices seem outrageous, they probably are. If it’s cheaper to buy than rent, you might be on to something, especially if you love the home. Good luck!

joseMarch 2, 2015 at 8:34 pm -

Hi I was on short sale January 2012, 3 years ago. Can I get a conventional loan mortgage my credit score is 712 now, also can put 20% down.

Colin RobertsonMarch 3, 2015 at 11:03 am -

Jose,

Fannie and Freddie have a two year waiting period if there were extenuating circumstances, otherwise it is four years.

DianeMarch 4, 2015 at 10:18 am -

Colin,

I love reading your answers to the postings on here. M situation is I currently have a 1st and a 2nd mortgage on my primary home. My 1st is $151,000 at 4.625 (Conventional loan) and my 2nd (home Equity loan) is $56,000 at 6%. Comps in my area have been selling for up to $280,000. I had to do a short sale on a rental property in 1/2012 due to the renter totally destroying the property making it impossible to fix up and rent again or to sell for the value. I am trying to refinance my primary home now to roll both loans together with a cash out of $10,000 to do some home improvements. My credit score is 649. What is my best option? I have been offered an FHA at 3.25% (paying 1 point) with $12,000 cash out and the settlement costs would be $14,000, making the new loan $235,000 versus $208,000 currently. Should I wait until 1/2016 and do a conventional or take the offer of the FHA at 3.25?

Reading these posts and your comments have been a huge help.

Colin RobertsonMarch 4, 2015 at 11:12 am -

Diane,

The downside, as I’m sure you know, are the MIPs on FHA loans, both upfront and monthly, and for the life of the loan now. At least they recently slashed the upfront one. The upside is that the 3.25% rate is likely much better than the rate you’d probably receive for a conventional loan. And who knows where conventional rates will be in a year. Sure, they could be the same or lower, but they could also be 5% or higher. Do the math and that might help you weigh the pros and cons of taking the FHA loan now or waiting another year.

naryMarch 5, 2015 at 9:30 pm -

Hi Colin, I am trying to refinance my house. I can’t decide to go with FHA for lower rate 3.5% or conventional loan with higher 4.25% but with no PMI. Which one is best?

Colin RobertsonMarch 10, 2015 at 7:50 pm -

Nary,

It depends on the cost really, and how long you plan to keep the loan. You’ve really got to do the math to figure that out.

maeMarch 11, 2015 at 4:53 am -

stumbled upon this website after searching the pros and cons between fha loan and conventional loan and this article helps a lot in understanding it.

thank you

NancyMarch 22, 2015 at 5:27 pm -

I am looking at purchasing a home and would like to know if there are requirements regarding commuting to work distance from your home. Are there requirements for this for FHA and/or conventional loans?

AlexMarch 22, 2015 at 9:58 pm -

Hello i want to refinance my house because my interest rated is at 6.5 percent the only loan i qualify is the FHA loan . House payment is 1400 paying only interest nothing to principal and with the FHA loan my payment would drop like $50 .. The only thing is that i dont want to pay the extra insurance for 30 yrs i dont know if its a good plan to go with the FHA loan…

Colin RobertsonMarch 23, 2015 at 5:02 pm -

Alex,

You could potentially refinance to FHA then refinance out of FHA later to remove the insurance if you become eligible for other types of loans in the future, but the savings need to be good enough to make sense.

PatApril 6, 2015 at 9:38 am -

I had a short sale in Jan 2013 and am now renting…I am looking to buy a condo in a 55+ community that is only $40,000. I have cash for a downpayment and good credit but cannot find anyone to approve a mortgage for me? The condos are not FHA approved. What are my options?

Colin RobertsonApril 6, 2015 at 2:21 pm -

Pat,

Since your short sale was only two years ago, it doesn’t sound like you’d qualify for FHA unless you could prove extenuating circumstances. It’s possible there is a portfolio lender out there willing to lend in spite of a recent short sale, though the interest rate will likely be higher to compensate.

mathew0603May 4, 2015 at 5:49 pm -

I have an FHA loan with 4.25% rate since 2012 that I bought the house. But am thinking of Refinancing for a better rate or should I wait till 2017 that the PMI will expire on the loan. I have a FICO of 691 now. You input will be appreciated. Thanks

CinCinMay 4, 2015 at 6:48 pm -

Hi Colin. You’re such a lifesaver. Thanks for the informational responses. My question is, Can I roll over down payment and other closing costs into the loan if I have no down payment? The FHA we’re pre-approved for will take a bit longer and I’d like to close faster because we’re moving out of town.

Colin RobertsonMay 5, 2015 at 3:33 pm -

Mathew,

You might be able to refinance to conventional and drop the MIP now if the LTV (existing loan balance / current value) is 80% or less. If you refinance into FHA there is now MIP regardless of LTV.

Colin RobertsonMay 5, 2015 at 3:59 pm -

CinCin,

The upfront MIP can be financed, as for other closing costs, consider a lender credit (higher interest rate in exchange for covering those costs) or a seller contribution. Your real estate agent/broker/lender should be able to advise you on possible options.

tracyMay 22, 2015 at 8:30 pm -

hi Colin.

I sent my agent a preapproval letter for a fha loan to try and purchase a short sale. however as time passed my lender began to explain to me that the conventional loan would be a better option for me, because I was trying to get out of paying the monthly pmi. will this start the process over with the bank since we have to change all of the paperwork over to conventional? my agent has other back up offers on stand by, in case my contract falls thru

Colin RobertsonMay 23, 2015 at 7:53 am -

Tracy,

A pre-approval shouldn’t take long, but a full underwrite could take a bit longer. Ask the lender to be sure.

OmekaMay 27, 2015 at 11:08 am -

Hi Colin first thanks for all the helpful information. I’m renting a home now an the owner wants to sell. His asking price is a lot less then what it’s valued at. It’s a great investment for a first time buyer like myself, but it needs a lot of upgrades an on top of that I would want to enlarge my kitchen. My credit score is 688 an I was interested in applying for a FHA loan but I’m not sure they will allow me to borrow up to the appraisal price so I can have the extra money to do the addition an upgrade. Will I be able to get a FHA loan up to the appraisal price an pay him what he’s asking and then do all the upgrades I want?

Colin RobertsonMay 28, 2015 at 11:48 am -

Omeka,

You could look into a FHA 203k loan that includes money for expected renovations.

PeterMay 28, 2015 at 10:46 pm -

Hi Colin,

My wife and I were approved for an FHA loan up to $250,00 and we told them we can only put a downpayment of $10,000 down if necessary. After condo and house hunting, we realized condos were best but none are FHA approved. Do you know if we would be able to qualify for a conventional or why our lender chose that option? We are first time home buyers and are only looking at condos around 110-130k and we both have credit scores above 780. Thanks.

Colin RobertsonMay 29, 2015 at 9:07 am -

Peter,

It’s true that many condos aren’t eligible for FHA financing, as far as why the lender chose FHA I don’t know. Could be low credit scores or some other issue, or no issue at all. Probably best to ask if you qualify via the conventional route (and to what purchase price) so you can continue your search.

SarahJune 10, 2015 at 3:42 am -

Me and my husband are searching for the best loan to fit our needs. We already have land and want to built on it. Is the FHA loan possible, since we have land and want to built?? Our land was appraised for 63k, and we started to go with the conventional loan, but we are afraid that we will not qualify or receive a high interest rate because of our credit that we are trying to clean up. What are the ideal credit score for a conventional, we know we would have the 20% down payment. With the FHA can the land stand for the down payment??

Colin RobertsonJune 10, 2015 at 2:17 pm -

Sarah,

You could look into the FHA OTC (One Time Close) program and potentially use land in lieu of a down payment. The conventional route requires better credit (620+) in most cases but you can avoid mortgage insurance. Might want to work on your credit as well to broaden your options.

BobJune 11, 2015 at 6:24 am -

Hi Colin,

As a seller of a house in Denver, CO where it is a seller’s market do we avoid the FHA loan bid versus the conventional loan? Does the seller have to pick up more costs at closing with a FHA loan? What are the pitfalls for the seller with FHA financing? Thanks for your information!

Colin RobertsonJune 11, 2015 at 3:33 pm -

Bob,

Good question…ultimately a seller should want to select the buyer that is most likely to close, which could be either conventional or FHA. With FHA you probably have a weaker borrower (in most cases) because of lower credit score and/or down payment requirements, which could present more risks in terms of actually closing. That might be the pitfall…though there are plenty of good FHA borrowers out there too. And FHA financing opens the door to more potential bidders. Who picks up what costs can be negotiated regardless of the financing route the buyer takes, though the limits might be different.

ErickaJune 14, 2015 at 2:06 am -

Hi Colin,

My home has been under an FHA loan which I took out 14 years ago on a 30 year mortgage but my account type on my mortgage company site now says I have a Conventional Without PMI mortgage however, I still pay insurance and taxes through my monthly payment to them. My interest rate is horrible but I don’t know if I can quality for a refinance. Does my loan type saying Conventional Without PMI mean that I can have the mortgage company change my payment amount to only principle and interest payment? Is qualifying for a refinance the same as qualifying for a mortgage, i.e. based on credit? Thanks!

Colin RobertsonJune 18, 2015 at 10:38 am -

Ericka,

A refinance is just a type of mortgage. Qualification will be based on your job, income, assets, amount of equity in home to determine LTV, credit score, and so on. When you refinance you can ask for no impounds if you want to pay taxes and insurance on your own.

JaniseJuly 10, 2015 at 6:50 pm -

With an conventional loan, I have the 7% down payment, DTI is 12% and the credit score. But I have one dang collection for $2000. Will that stop my loan process? How strict are they compared to fha for a first timer?

Colin RobertsonJuly 15, 2015 at 12:06 pm -

Janise,

For collections at/over $2,000, it may need to be paid off or a payment agreement may need to be in place. However, it may not be an issue for you because your DTI ratio is already so low. If it were closer to the maximum allowed, the collection would potentially be more of a roadblock because it generally needs to be factored into your monthly obligations. A strong borrower profile should help you avoid any problems.

KaciJuly 26, 2015 at 5:31 pm -

Is a NACA loan better than an FHA loan?

Colin RobertsonJuly 27, 2015 at 8:49 am -

Kaci,

It depends on your situation – compare the rate/costs of each with your personal goal to determine which is best.

dsAugust 8, 2015 at 8:23 am -

Hi, just stumbled on your site looking for alternatives for FHA loans. My daughter and her fiance have good incomes for our area (combined 120k), but unfortunately his credit score is not great (in the 600s I think). Hers is 792, but his salary is higher so that brings their score down considerably. Also, after paying off his student loans this year, they won’t have enough to put down 20%. The loan officer is only offering an FHA loan, but seems crazy to be stuck with mortgage insurance for the life of the loan when their incomes would allow them to pay off the 20% principle within the first year or two of the loan. Are there any other mortgage loans available to them with lower down payments and mortgage insurance that doesn’t stay with them forever??

PatSeptember 27, 2015 at 12:38 pm -

I am selling my house and will be buying another one. I have a 752 credit score. My sister and I want to buy a house together but she filed bankruptcy 3 years ago due to her husband having a heart attacks and no income. She has since been paying all her bills on time and her credit score is up to 659. Will we be able to get a loan?

Colin RobertsonSeptember 28, 2015 at 11:16 am -

Pat,

It depends if she can prove extenuating circumstances to shorten the waiting period. Otherwise the waiting period can be pretty long to get a mortgage. If you don’t need her to qualify for the loan, you could potentially keep her off the loan if lenders won’t approve her due to the BK and credit score.

PatriceSeptember 30, 2015 at 5:04 pm -

Hi Colin,

I stumbled across this by looking for answers to FHA or Conventional. It’s been a great help. My question is I am a first time buyer with a overall credit score of 723. I’ve been approved for a conventional but hearing the amount I may have to bring to closing is extremely high for me. I have the 5% which is about 6600. But the lender is saying I will need around 13k @ closing. Why would that be and should I choose the FHA instead? Please help! And thank you in advance.

Colin RobertsonOctober 1, 2015 at 10:42 am -

Patrice,

Not sure I’d go with FHA over conventional just because of closing costs, but if you must, then you must. Ask the lender to break down ALL the costs and do a side-by-side comparison to determine the differences. You may also be able to structure the loan where less comes out of pocket, perhaps in exchange for a slightly higher interest rate if that suits you better.

ShondaOctober 2, 2015 at 10:07 pm -

I have been working with a mortgage company since May on a conventional loan. Approved and everything. I new about the PMI issues so definitely did not want FHA. I also have always carried my own escrow and was putting down enough to bring the loan to value amount below 80%. I bought the house April 1, 2015 with my brother in law putting up the cash as the “bank” with the agreement that I refinance immediately. In May as stated I started the process. My mortgage person has drawn the process out with one excuse after another and on the last day of September informed me I can no longer go conventional because I have been in the house less than two years. I made it very clear I needed this done before the rules changed again in August. He said this was one of the new changes. I am furious and don’t know what to do. Is there no way around this? He now says FHA is my only option and I have to escrow and carry PMI for life. Payments will be more than they are now by several hundred dollars and cost me 4k a year in PMI alone.

maxine risperOctober 3, 2015 at 5:37 pm -

My mother died, I am the trustee. I want to sell the house to my son. FHA approved the loan , but when they found out I was the seller and related to the buyer. They would not approve the loan. The underwriters said there is a Identity clause in FHA guidelines. that the seller cannot be related to the buyer.Iam totally confused

ReneeOctober 6, 2015 at 5:18 pm -

Colin, love this site and your informative responses. I’m in the process of purchasing a home. Qualify for FHA and conv….leaning toward the conventional 97 program. Do you know if this program is only for first-time homeowners? Thanks for your assistance!

Colin RobertsonOctober 7, 2015 at 11:11 am -

Renee,

I believe Freddie Mac allowed all borrowers and Fannie limited it to first-timers, but recently removed that requirement for one-unit principal residences.

Colin RobertsonOctober 7, 2015 at 11:42 am -

Maxine,

FHA has an “identity of interest” cert that lowers the max LTV to 85% if the purchaser and seller are related.

Colin RobertsonOctober 7, 2015 at 11:50 am -

Shonda,

You might want to try another loan officer/broker/bank to see what alternatives you have.

ChristopherDecember 6, 2015 at 7:08 am -

Hi Colin,

This site is outstanding and your responses are extremely informative. My fiance and I want to purchase a $230,000 house but we only have about $10k to $12k to put down. We both have good credit (780s). Since we can’t put down 20%, we would have to pay PMI on a conventional loan. So for those who can’t put 20% down on a conventional loan, it seems that there’s zero advantage to getting a conventional loan since you have to pay PMI either way. Question: For those who can’t put down 20% and avoid PMI, is there ANY advantage to choosing a conventional loan?

Colin RobertsonDecember 7, 2015 at 11:47 am -

Christopher,

I’ve mentioned the various advantages of going conforming…more loan options, no PMI for life (or at all), lower DP requirement, etc. Also, it’s possible for someone to get an 80% first mortgage via the conventional route and a second mortgage while avoiding PMI entirely. So there are some complexities involved but for some, like you alluded to, FHA may be the way to go.

Colin RobertsonJanuary 6, 2016 at 12:03 pm -

John,

The APR is usually higher than your interest rate because it factors in certain closing costs to give you a more complete picture of what your total borrowing costs are. Two different rates may appear equal but if there are huge closing costs tied to one rate it may actually be a worse deal even if the rate is lower. In any case your actual rate of 3.75% is what monthly payments should be based on.

KaseyJanuary 6, 2016 at 3:56 pm -

Hi Colin, thank you very much for your help, awfully kind of you! I am interested in purchasing a condo for $89.000. It is not FHA approved. The realtor said that it has to be a conventional loan, however, I belong to a credit union. Can a credit union do a FHA loan if the condo is not FHA approved? Also, I was wondering if I should go with FHA or conventional loan? I have very good credit but was trying to avoid putting 20% down, I want to put the lowest amount possible for a down payment. However, I’m trying to see what is the best overall. Please advise. Again, with heartfelt thanks for providing us with your knowledge!

Colin RobertsonJanuary 6, 2016 at 4:11 pm -

Kasey,

Lenders can’t override the FHA’s condo approval system. As far as which loan to pick, there are now conventional loan options with just 3% needed for down payment via Fannie and Freddie, which is less than the 3.5% the FHA asks for. But it doesn’t sound like you have a choice anyway…good luck!

DonteMarch 16, 2016 at 8:03 pm -

Colin, I wish you were our loan officer. You have great knowledge! My scenario is this: my wife and I are buying new construction and we had a pre approval now midway through the house being built we have been told that we were denied for our conventional loan through the builders mtg company. I had a foreclosure process started on my home back in 2010 but it eventually got modified and the payments have been current since then but the lender is saying that because the foreclosure was started and because of the modification we have to wait 7years for conventional. Is this true?? Also my middle score is 686 and we have 95k to put down(17%) should we try elsewhere for a conventional loan or would FHA be our best bet?? Thanks in advance.

TonyMarch 21, 2016 at 9:06 pm -

My FICO scores are 775, 765, and 761. I want to purchase a home in the 200k range and have 40k for a down payment. My income is only about 60k per year though since I work in education. I also pay 800 a month in student loans. That is my only debt payment. My state has a special program for educators who earn less than 70k. It is through an FHA loan. I do not want to pay PMI though. Would I be better off with the FHA or should I seek a conventional loan? Thanks for answering our posts!!!

Colin RobertsonMarch 22, 2016 at 11:32 am -

Tony,

It’s definitely worth looking into both options, especially with your stellar credit and large down payment. If you can get a conventional loan you’ll be able to forego PMI and potentially save a good amount monthly.

NatalieApril 24, 2016 at 12:17 pm -

Is a USDA loan better than an FHA if we qualify? Still would put down at least 3-4% on a USDA, just wondered if those numbers come out better. Also, if we qualify for a conventional loan as well, is it better to just go that route? Loan officers are confusing me because each seems to want to push me in varying directions and I don’t feel like I can get a straight answer.

AnnMay 2, 2016 at 1:07 pm -

Hello Colin: Thanks for taking time to respond to questions. Here is mine – I am looking to refinance my home. Appraised value is $350k, have $245k left on prior mortgage, have a credit score of 780. I do have several options so hard to narrow down. Which is best FHA or conventional loan?

Colin RobertsonMay 2, 2016 at 2:29 pm -

Ann,

I would assume most people would go conventional because you can avoid costly mortgage insurance entirely and get a low interest rate with 70% LTV and excellent credit. From there you still need to decide between 30-year fixed, 15-year fixed, ARMs, etc.

JohnOctober 14, 2016 at 2:48 am -

I’m buying a home in Texas for 240,000. My credit score is 720 and I have the 20% down. My goal was to go conventional so I could cut the PMI and pay my own escrow. Now I’m not sure if. I may want to go FHA so I won’t have to pay all that money upfront ($53,000). Is paying your own escrow better vs letting the lender do it? Which would be a better choice in my case FHA or conventional?

Colin RobertsonOctober 14, 2016 at 6:35 am -

John,

As you mentioned, you can avoid PMI with a 20% down payment and the conventional route, which is a plus in that you won’t have to pay costly MI. With FHA, you have to pay MI upfront AND monthly for the life of the loan (in most common scenarios). But if you don’t want to part with all that cash (or tie it up in your home) you may have to bite the bullet and pay MI, whether upfront or via a higher interest rate if you go conventional. There are many different ways to pay MI with a conventional loan that a loan officer or broker can explain. As far as escrows go, many lenders charge a fee if you want to pay taxes/insurance yourself, so it often doesn’t make sense unless it’s free and/or you have grand plans with that money for the bulk of the year when it’s in your own account.

BeatriceOctober 25, 2016 at 3:43 pm -

Hi colin

can i go from my FHA loan to conventional loan? if yes what are the requirements thanks

Colin RobertsonOctober 25, 2016 at 7:51 pm -

Beatrice,

Yes, as long as you qualify for a conventional loan. There are various requirements, such as a max LTV, minimum credit score (generally 620), and so on. You may want to consult with a bank/broker to see if you qualify and if it makes sense to refinance into a conventional loan. Good luck!

DavidDecember 30, 2016 at 7:37 pm -

I refinanced my loan in 2014. I originally purchased my home in 2003. I am under the 80/20 LTV requirement. I never inquired about getting my PMI removed after five years being that I didn’t know I was able to do that until recently. Will I be able to remove my pmi since my original fha loan was from 2003. Or am I stuck paying the PMI because of the refinance. My mortgage company is not giving me any answers. Where can I find out more information about my situation. Thanks in advance for any help in this matter…

Colin RobertsonJanuary 3, 2017 at 9:45 am -

David,

The LTV based on the original sales price will need to be 78% for MIP to fall off. You can ask your loan servicer when this projected date will occur. Alternatively, if your property is valued where the outstanding loan will be 80% or less, you can also refinance out of the FHA and drop the MIP immediately, though you’ll want to make sure interest rates are favorable and refinancing is a good option for you.

Bello NeroJanuary 11, 2017 at 11:49 am -

Colin,

I am considering refinancing my mortgage for our residential home. The lender offering 3.99/% FHA with $3700 due at signing after all lender rebates or 4.50% Conventional all closing cost in for 30 year fixed. This reduces my current payment by about $400. LTV is a little under 80%. The payment is all in including MIP. What do you suggest?

Colin RobertsonJanuary 12, 2017 at 11:20 am -

Bello,

You need to determine when the monthly savings outweigh the upfront costs…so if you stay in the loan long enough to cover the upfront costs, you’ll begin saving money each month.

KurtisJanuary 28, 2017 at 6:39 pm -

Colin,

Does it make a difference which mortgage broker a person goes with? Don’t they all look on the market and pull the best loan based on your credit score? I have always gone with friends but don’t know if I am getting the best rates.

2nd question. I want to do a cash out refi. Home is worth $500,000. Want a loan for $260,000. Credit Score is around 680. Equfax is 692. Would it be better for me to do convention loan or a FHA loan?

Thank you.

Colin RobertsonJanuary 30, 2017 at 4:42 pm -

Kurtis,

It depends where the broker places your loan. Their compensation (and rates/fees) can vary significantly from lender to lender, meaning it matters where the loan winds up.

FHA is generally geared toward those with less to put down or lower credit scores, and FHA can be a negative because mortgage insurance is required even if the LTV is very low (like yours appears to be at just over 50%).

Shane KelleyFebruary 8, 2017 at 9:08 pm -

Hi Colin,

Great site and thank you for your many posts responding to so many people!

I’m going in with less than 20% down (5% max) on a condo that costs 350k. Lender is offering 20% closing cost help. However I saw a disclaimer that states seller closing help on a conventional is capped at 3% – is that a Federally set limit?

I’m being offered FHA and conventional options, we are not likely to be able to make more than the minimum for at least two years.

Any thoughts on options and is there a site where I can plug in numbers and generate cost comparisons? I also reached out to my loan officer as suggested here.

All the Best and again thank you

Colin RobertsonFebruary 9, 2017 at 9:20 am -

Shane,

It sounds like they’re offering to pay a fifth (20%) of your closing costs. The 3% figure is based on the sales price, which would likely be way more than a fifth of the closing costs. These seller concessions are capped by Fannie, Freddie, the FHA, and so on. There might be a tool to compare costs out there but I’m not aware of it.

Shane KelleyFebruary 9, 2017 at 8:50 pm -

Colin my apologies they are offering 20k not 20%. But I guess it would be capped if I go conventional. I did find a cool site to compare loan costs.

Sorry about my typo and thank you for the response!

ChristineMay 29, 2017 at 6:32 pm -

One of the pros listed for FHA is that closing costs and down payment can be from a gift. Are there limitations on gift money use through a conventional loan?

Colin RobertsonMay 30, 2017 at 2:56 pm -

Christine,

Fannie and Freddie used to have a rule where you needed a 5% minimum borrower contribution if the LTV was above 80%. The requirement was removed in late 2015. However, there are still situations where a minimum contribution is necessary, for example, if it’s a multi-unit property.

RichardJune 1, 2017 at 5:47 am -

Hi Colin,

Can I have a conventional loan with 15% down payment and then in say 6 months use savings to buy an investment property, and if so what down payment would I need as a minimum for the rental property ?

Thanks

Colin RobertsonJune 3, 2017 at 10:41 am -

Richard,

Generally, you need at least 15% down, but 20% will avoid PMI and likely provide a lower interest rate.